Mortgage Rate Predictions for 2013: Why 4% Is the Line for 2013

Mortgage Rate Predictions for 2013 Suggest that the Rate Recovery Shouldn’t Push 30-Year FRMs Up Over 4%. There Are a Few Reasons Why This Is a Reasonable Prediction.

Mortgage Rate Predictions 2013

At the outset of the year, expert mortgage rate predictions for 2013 expected minor increases up from the record lows of late 2012. Early in 2013, it even looked like they had been too conservative about how good rates would stay for borrowers, but by mid Spring, benchmarks for 15 and 30-year FRMs had begun to recover a bit. Predictions of below 3.75% at the highest changed to “hovering around 4%.” That’s still an incredible rate for borrowers compared to historical precedent, but the question is obviously whether rates will actually do what experts expect or if they will again prove that the pros are often little better than the average educated guess. There are a few strong arguments for why mortgage rates should stay around 4% for the rest of the year and into the early part of 2014.

The first is that the most important factor that contributed to record lows remains; the Federal Reserve Bank is continuing its strategy of quantitative easing by buying mortgage-backed securities and using other tools in an effort to keep rates low so people have access to affordable financing. This is one of the most powerful forces in the global economy for keeping interest rates down because if the Fed wants to keep a lid on inflation, they have lots of tools to slow down the economy and directly impact the primary interest rate benchmark.

But if that’s the case, why did rates go up at all? There are other forces than the Fed that also influence mortgage rates, especially if you start looking at the what rates banks will actually offer, referred to as the “best executable” rate, which is typically a point or more above benchmark rates. The most obvious is that banks and rates respond to expectations. So if they think some force will push the rate up in the future, they adjust their rates up no so they won’t lose money on loans when those rates do materialize. This is because of things like fixed-rate mortgages, which cost banks a lot of money if they let you lock in an unsustainably low rate and then rates climb. You’ll have their cash, so they can’t loan it out at better rates, and you won’t have any incentive to pay it off quickly because you can make more money by investing at those higher rates than you would save by paying off early.

So things like the last Jobs Report, which suggested that the economy is finally recovering to a reasonable degree, exerted some upward pressure on all interest rates. Further, multiple reports from big industry names came out in the spring indicated that purchases of existing houses and new constructions had begun to increase again, another sign that borrowers’ demand for loans should be exerting upward pressure on mortgage rates.

The Fed then responded to all this news by announcing that it would begin tapering off some of its easy policies, especially buying mortgage-backed securities, at some point in the future. Although they assured everyone that they’d continue through 2013, albeit maybe at a reduced scale, this precipitated the big jumps in rates through Spring.

So you can look at the factors that led to the drop initially – a sluggish economy and housing market coupled with deliberate Fed policies to keep rates down – and the events that led to the spike, and see that after the spikes rate changes started to stabilize. This offers the first and strongest piece of evidence that stabilizing mortgage rate predictions for 2013 might prove accurate. Banks and markets have adjusted to all this new information and it would take another major announcement or a surprising leap in activity to make them feel safe about raising rates more. The Fed’s actual continuation of its easing policy has helped to calm concerns that they’d begin relaxing purchases in the immediate future, further contributing to rate change stabilization.

On top of the fact that rates have stabilized and adjusted to these forces, the reality is that if rates and the economy started to heat up much more quickly or increases for the year went up much more, the Fed would be likely to act to prevent harmful inflation. Any such action would constrain interest rates including mortgage rates, helping keep them from going much over 4% in 2013.

However, while the average should stay well below 4% and the daily rate should flirt with that number, it’s important to note that a number of pros are emphasizing rate volatility, especially with regard to mortgage rates. So while you can bet that you don’t miss out on much if you’re looking at a benchmark rate of 3.85% today and you wait, there is a chance that you’ll have to sit through a few agonizing days or a week where the rate jumps as much as .1% or .15% over that week before settling back down. So as long as you are either ready to jump or can wait it out, these mortgage rate predictions for 2013 should prove useful for your mortgage plans.